Pricing: Reality Check

In 1776 Adam Smith stated:

“It is the maxim of every prudent family man, never to try to do at home what will cost him more to do than to buy. If a foreign country can do it, it is better to buy it with some part of the money.” product of our own industry, employed in a way in which we have some advantage”.

This is the natural order of the economy. Tariffs attempt to alter this law of economics. Tariffs adjust wages by imposing a tax that is equivalent to an economic adjustment. The need for tariffs is supported by the argument that since people in lower-wage economies earn pennies on the dollar compared to workers in higher-wage economies, higher-wage economies will experience relatively high unemployment. with the economy with lower wages. Well, this is not true based on the empirically supported economic theory established by David Ricardo in 1810.

A workforce in a higher-wage economy specializes and gains efficiency gains from the things it does well. Consider the wage economy in manufacturing Nike shoes versus aerospace products.

According to Matthew Kish in his May 20, 2014 article, Nike pays its contract factory workers in Vietnam $73.94 a month, which is on the higher end of the wage scale for shoe factory workers (workers in Bangladesh they earn $36.01 a month, as reported in the same article). This wage equates to $0.43/hour based on a typical US work year of 2,080 hours. The manufacture of footwear requires unskilled and semi-skilled labor for its manufacture; therefore, the barrier to entry is low. The wage disparity between Vietnam and the US is impossible to overcome, making it highly unlikely that Nike shoes will be made in the US.

According to Statista, based on data compiled by the Congressional Research Service, the US exports more than $15 billion worth of aerospace products and parts to China and this volume is growing year on year. The average aerospace manufacturing machine operator earns $30.17 per hour or $5,229 per month according to the U.S. Department of Labor’s Bureau of Labor Statistics. Aerospace product manufacturing is highly specialized, and manufacturers are constantly improving efficiencies in manufacturing. manufacturing, thus creating a high barrier to entry.

In April 2010, Phillippe Martin, Thierry Mayer, and Mathias Thoenig published that free trade agreements result in political peace because the opportunity cost of war is too high. The authors go on to state that security and economic gains are complementary and that if commercial gains are not realized, then security benefits are jeopardized.

The bottom line is that Americans are unlikely to accept $0.43 an hour to make shoes and Chinese workers and infrastructure are not prepared to earn $30.17 an hour making aerospace products. Tariffs are highly unlikely to lead to significant long-term changes in trade imbalances based on the two basic examples provided. Tariffs may endanger US security interests in Asia, such as the South China Sea, Taiwan, the Korean Peninsula, Japan, etc. since the opportunity cost of the conflict is reduced. Part of the current trade dispute between the United States and China centers on technology theft.

When I lived in Malaysia I witnessed the Chinese theft of American technology. In my opinion, technology theft is much more complex than a fee-based solution can provide.

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